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After completing this reading, you should be able to:
- Describe the inputs, including factor betas, to a multifactor model.
- Calculate the expected return of an asset using a single-factor and a multifactor model.
- Describe properties of well-diversified portfolios and explain the impact of diversification on the residual risk of a portfolio.
- Explain how to construct a portfolio to hedge exposure to multiple factors.
- Describe and apply the Fama-French three-factor model in estimating asset returns.